Companies Need Not Hire Outside CEOs
to Stimulate Fundamental Change

Directorship

by Jim Collins and Jerry I. Porras

October 1994

Drawing upon a six-year research project at Stanford University
Graduate School of Business, we took eighteen truly exceptional
and long-lasting companiesthey have an average age of nearly
100 years, outperforming the general stock market by over fifteen
times since 1926and studied each company in direct comparison
to one of its top competitors. We examined the companies from
their very beginnings to the present dayas start-ups, as
mid-sized companies, and as large corporations.

In our research, we sought to answer one basic question: What
makes the truly exceptional companies different from other
companies? What has consistently separated companies like General
Electric, 3M, Motorola, Johnson & Johnson, Boeing, Wal-Mart, Hewlett
Packard, Procter & Gamble, Walt Disney, and Philip Morris from
their rivals?

Our main objective was to go beyond the incessant barrage of management
buzzwords and fads of the day to discover timeless qualities that
consistently distinguish outstanding companies, and to translate
these findings into a useful framework of practical concepts that
managers and directors can apply. We came to call these premier
and long-lasting institutions "visionary companies."

Our work, which culminated in the new book BUILT TO LAST: Successful
Habits of Visionary Companies (HarperBusiness, 1994), shattered
numerous widely-held management myths. (See sidebar article).
One of the most powerful myths called into question by our research
is that companies should seek to hire CEOs from the outside in
order to stimulate fundamental change.

In seventeen hundred years of combined lifespans, we found
only four individual incidents of going outside for a CEOand
those in only two companies. (Results date to 1992). Homegrown
management rules at the visionary companies to a far greater degree
than at the less-successful comparison companies (by a factor
of over six times). Simply put, there is absolutely no inconsistency
between promoting from within and stimulating significant change.
Visionary companies have shown, time and again, that they do not
need to hire top management from the outside in order to get change
and fresh ideas. Equally important, our research shows why it
is extraordinarily difficult to become and remain a highly visionary
company by hiring top management directly from outside the organization.

Consider the case of Jack Welch and The General Electric Company.
In 1981, Welch became chief executive of GE. A decade later, he
had become legendary in his own time, "widely acknowledged," according
to Fortune magazine, "as the leading master of corporate
change in our time." To read the myriad of articles on Welch's
revolution, we might be tempted to picture him as a savior riding
in on a white horse to rescue a severely troubled company that
had not changed significantly since the invention of electricity.
If we did not know Welch's background or GE's history, we might
be lured into thinking that he must have been brought in from
the outside as "new blood" to shake up a lumbering, complacent
behemoth.

Nothing could be further from the truth

For one thing, Welch was pure GE home-grown stock, having joined
the company directly out of graduate school one month before his
25th birthday. It was his first full-time job, and he worked at
GE for twenty consecutive years before becoming chief executive.
Like every single one of his predecessors, Welch came from deep
inside the company.

Nor did Welch inherit a grossly mismanaged company. Quite the
opposite. Welch's immediate predecessor, Reginald Jones, retired
as "the most admired business leader in America." Furthermore,
Welch is not the first change agent or management innovator in
GE's panoply of home-grown chief executives. Under Gerard Swope
(1922-1939), GE moved dramatically into home appliances. Swope
also introduced the idea of "enlightened management"new
at the time to GEwith balanced responsibilities to employees,
shareholders, and customers. Under Ralph Cordiner (1950-1963)
and his slogan "Go for it," GE exploded into a vast array of new
arenas. Cordiner radically restructured and decentralized the
company, instituted management by objective (one of the first
companies in America to do so), created Crotonville (GE's now-famous
management training and indoctrination center), and wrote the
influential book New Frontiers for Professional Managers.
Fred Borch's tenure (1964-1972) was "a time of creative ferment"
and a willingness to make bold, risky investments in such areas
as jet aircraft engines and computers. Reginald Jones (1973-1980)
became a leader in changing the relationship between business
and government.

Indeed, Welch comes from a long heritage of managerial excellence
atop GE. Using pre-tax Return On Equity (ROE) as a basic benchmark
of financial performance, GE under Welch's predecessors performed
as well on average since 1915 as GE during Welch's first decade
in office.

Management guru

This in no way detracts from Welch's immense achievements. He
ranks as one of the most effective Chief Executive Officers in
American business history. Butand this is the crucial pointso
do his predecessors. Welch changed GE. So did his predecessors.
Welch outperformed his counterparts at Westinghouse. So did his
predecessors. Welch became widely admired by his peersa
"management guru" of his age. So did his predecessors. Welch laid
the groundwork for the future prosperity of GE. So did his predecessors.
We respect Welch for his remarkable track record. But we respect
GE even more for its remarkable track record of continuity
in top management excellence over the course of 100 years. To
have a Welch-caliber CEO is impressive. To have a century of Welch-caliber
CEOs all grown from insidewell, that is one key reason why
GE is a visionary company.

In short, it is not the quality of leadership that separates visionary
companies like GE from less successful companies over the long
term. It is the continuity of quality leadership that matterscontinuity
that preserves the core values and purpose of the institution
while simultaneously stimulating progress into the future. Both
the visionary companies and the comparison companies in our research
study had excellent top management at certain points in their
histories. But the visionary companies had better management development
and planning. They thereby ensured greater continuity in leadership
talent grown from within than the comparison companies in 15 out
of 18 cases.

If you're the chief executive or board member at a large company,
your company should have management development processes and
long-range succession planning in place to ensure a smooth transition
from one generation to the next. The key is to develop and promote
insiders who are highly capable of stimulating healthy change
and progress, while preserving the enduring core ideology of the
institution. They are there, you just need to find and develop
them.

From the perspective of building a visionary company, the issue
is not only how well the company will do during the current generation.
The crucial question is: How well will the company perform in
the next generation, and the generation after that, and
the generation after that? And so on. All individual leadersall
outside "saviors"eventually retire. But a visionary company
can tick along for centuries, pursuing its purpose and expressing
its core values long beyond the tenure of any individual leader.
In order to achieve this, the company must have the ability to
attract, select, retain, train, develop, and promote superb managerial
talent from within.